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In an environment where cryptocurrency is gaining popularity, certain institutions have already expressed interest in the digital currency, such as Ethereum or Binance coin. Under plans from the Treasury and the Bank of England, Britain could launch a digital currency known as "Britcoin" within the next decade. anika sidhika writes
In response to the rise of privately issued cryptocurrencies and stablecoins, the government has launched a four-month public consultation process. It builds on an initial working group established by Rishi Sunak in 2021, when he asked the bank of england to investigate the case of a central bank-backed currency.
The central bank-backed currency would be "reliable and hold its value over time," unlike cryptocurrencies, which can fluctuate wildly and put investors' holdings at risk, according to the Bank of England.
That industry has been particularly volatile in recent months, fueling calls for more regulation. The crypto crises of last year sank assets, and the multi-billion dollar collapse and bankruptcy of crypto exchange FTX in November sparked fraud allegations against founder Sam Bankman-Fried.
For two compelling reasons, the government is considering the introduction of a digital pound. The first is that other countries are looking into developing this technology, and the private sector can also get involved with stablecoins, which are comparable to crypto assets but are tied to the value of existing currencies like Bitcoin.
According to the Atlantic Council, more than 100 countries have thought about using digital currency issued by central banks. following from Indonesia's work on a digital rupee prototype and Ghana e-cedi pilot program, Sweden has been working with Accenture in an e-krona. Eleven countries, including Jamaica and The Bahamas, have already implemented central bank digital currencies.
The Bank of England is right to worry that new types of monetary value, such as this one, could erode its control over the financial system and affect its ability to guide the economy.
The reason is that a digital pound could improve the payment system, allowing businesses and consumers to make faster, cheaper and smarter transactions. Micropayments for services may be possible with a less expensive and more automated payment system, opening up new business models.
The proposed digital currency would be denominated in pounds, with £10 of digital currency equivalent to a £10 note. The currency, which is held in a digital wallet, could be used to make electronic payments for goods and services.
Proponents of central bank digital currencies believe they make it easier and lower the cost of digital transactions, as well as increasing access to the financial system by allowing those without bank accounts to use them.
Advantages of cryptocurrency
speaking to International private bankerIan Taylor, Head of Crypto and Digital Assets at KPMG UK, says: “In an increasingly digital society, the UK needs to keep pace with the speed of innovation that is happening in the payments industry. The Bank of England consultation on a proposed CBDC is a sensible approach to keep the UK at the forefront of technological change without yet committing to the substantial investment that would be required to implement a digital pound.”
A new trend that has linked cryptocurrencies to the mainstream financial sector is central bank interest in the phenomenon, for both positive and negative reasons. What could be a disadvantage?
Peter Harmston, Partner and UK Head of Payments at KPMG UK, adds: “The benefits and challenges of introducing a digital pound need to be carefully considered. There are a number of factors that need to be taken into account, including the delicate balance between the inevitable decline in physical cash, the importance of ensuring that as an economy we are financially inclusive, and the current lack of consumer protection in the digital asset market. ”
In the context of the fight against money laundering and criminal financing, concerns about the anonymity of cryptocurrency use have been highlighted by central banks and other regulators. Despite their problems, do banks believe that cryptocurrency is credible?
“Not all crypto assets are the same. Unbacked assets are highly volatile and their value can drop to zero. Even some stablecoins have dropped to zero. That being said, some asset-backed, fiat-backed, and algorithmic or decentralized currencies have maintained their peg during periods of high stress. Finally, since many of the activities and entities will fall within the regulated perimeter shortly, this will give some levels of credibility to what in the end is just technology”, clarifies Taylor.
A digital pound is not without risk. The impact on the financial industry is significant. But how will this affect the whole of the UK as a whole?
"It's hard to say since the trials are still a few years away," explains Taylor. "The government's goal is to ensure that we are innovative and that we continue to lead the world in payments."
Although it is expected to provide the necessary infrastructure for a digital pound, the Bank of England does not indicate that it will engage directly with customers. Instead, people will store their "Britcoin" in wallets provided by financial intermediaries that also store your data; neither the Bank nor the Government will have access to these portfolios.
However, have banks looked at digital currency technology and security issues to see if Britcoin is a good investment?
“It was always a purely speculative asset,” says Andrew Haslip, director of content for Asia Pacific, GlobalData. ''According to our 2022 Global Wealth Managers Survey, it is going to yield good returns (36.1% capital appreciation) and 28.1% as a store of value. Neither of which applies anymore, the future will really depend on crypto exchanges becoming more strictly regulated and more trusted as financial partners."
Former Bank of England Governor Mervyn King, who is currently a member of the House of Lords, has stated that a digital pound would have “risks but no obvious benefits”.
Concerns about financial inclusion
Although the Bank of England does not claim that "Britcoin" will replace cash, it is certainly another step towards the digitization of banking, which has the potential to exclude those who are less tech-savvy.
The authorities are very interested for several reasons. As the digital revolution progresses and countries compete with one another for market share in the growing technology sector (including fintech), governments and central banks want to be seen as innovators.
Despite their controversies, do banks believe cryptocurrencies are trustworthy?
“Not all crypto assets are created equal,” comments Mr. Taylor. “Unbacked assets are highly volatile and their value can drop to zero. Even some stablecoins have dropped to zero. That being said, some asset-backed, fiat-backed, and algorithmic or decentralized currencies have maintained their peg during periods of high stress. Finally, given that many of the activities and entities will soon fall within the regulated perimeter, this will lend some levels of credibility to what is ultimately just technology.”
Another reason of interest is to be more practical. The use of cash has been drastically reduced in recent years, and this process has been further accelerated during the COVID 19 crisis due to the handling of banknotes and coins. However, it is important that the financial system provides a means of payment that is accessible to all.
The Bank of England will provide us with much more detail on how the digital pound is developing, but the market's readiness for this change remains an open topic.
“Although there is a lot of volatility in the market, HNW investors have only dedicated a small part of their wealth to cryptocurrencies, so it will not affect these big players much,” Haslip acknowledges.
Many aspects of society have been profoundly altered by recent advances in communications, data processing, storage, and encryption. Also, considering that money and payments are all about data management and communication, it is not surprising that these developments are putting pressure on the banking system. While our current system and the protocols it uses have evolved over time, its fundamental structure dates back to the Internet. Therefore, while digital currency is not new, it is essential to reassess our institutional framework to determine if and how it should adapt in response to the changing environment and, of course, the needs of society.
